洛克威爾自動化 (ROK) 2007 Q4 法說會逐字稿

Please standby for a realtime transcript. Thank you for holding and welcome to the Rockwell Automation quarterly conference call. I need to remind everyone that today's conference is being recorded. Later in the call, we will open up the lines for questions. (OPERATOR INSTRUCTIONS)

At this time I would hike to turn the call over to Rondi Rohr-Dralle, Vice President of Investor Relations. Ms. Rohr-Dralle, please go ahead.

Thank you, Francis. Good morning, and thank you all for joining us for Rockwell Automation's fourth quarter 2007 earnings release conference call. Our results were released earlier this morning and have been posted to our website at www.rockwellautomation.com. A webcast of the audio portion of this call and all of the charts that we reference during the call are available at that website. These will remain there for next 30 days. With me today are Keith Nosbusch, our Chairman and CEO and Ted Crandall, our CFO. Our agenda includes opening remarks by Keith, followed by Ted's review of both the quarter and our outlook. Ted will then turn it back over to Keith for an update on our capital structure. We will, as always, leave time at the end of call the call to take your questions and ask that you self limit to two questions to allow broader participation. We expect the call today to take about one hour. As is always the case on these calls, I need to remind you that our comments will include statements related to the expected future results of our company and are therefore forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Our actual results may differ materially from our forecasted projections due to a wide range of risks and uncertainties that are described in our earnings release and detailed in all of our SEC filings. With that, I will turn the call over to Keith.

Thanks Rondi. And good morning, to everyone who's joined us on today's call. Let me start by making a few comments about this quarter and the second half of the year. First, our strong performance in the fourth quarter and second half of the year demonstrated our ability to execute on our growth and performance strategies, again validating the strength of our business model. Second, I'm extremely proud of the efforts of our management team and employees in delivering these impressive results. It is gratifying to note that our performance in Q4 and the second half of the year played out very much as we expected. Modest revenue acceleration in the U.S., continued strength in Europe and Latin America improved performance in Asia, improved earnings performance, including much better productivity realization. And finally, this quarter capped another very good year for Rockwell Automation. Not only did we deliver excellent operating results, our successful disposition of the Power Systems business was a major mile stone in the transformation of our company.

Now, please flip to chart one in the reference material we posted in the web, that summarizes our full year results. The numbers on this page depict a very successful year by any measure. Let me highlight a few. We achieved 10% revenue growth reflecting our more diverse revenue base. We saw strong organic growth outside of North America with particular strength in Europe and Latin America. We also continued to see outstanding revenue growth in our process, CompactLogix and safety businesses as well as in the Life Sciences Vertical. Our ICS Triplex acquisition added a point of growth and our recent acquisitions will become an important contributor to growth in fiscal 2008. For the full year we delivered operating earnings growth of 13% and segment operating margins of nearly 20%. Although we started the year a bit slowly, improved productivity results made an important contribution to our margin performance. EPS from continuing operations increased by 29% to $3.70 hitting the high end of our July guidance range. 2007 was another strong year for free cash flow at $531 million or 93% of net income from continuing operations. And we saw continued improvement in ROIC, of 2 points, to more than 24%.

Enough about the past, let's focus on the future. 2008 will be a very exciting year for Rockwell Automation. We have laid out an ambitious plan, one that raises expectations for execution and reflects the continued transformation of our company and evolution of our business model. We believe our investments in key growth drivers such as technology leadership, expanded certain markets and strengthened global market presence are creating more opportunities for growth then ever before. As we look into 2008 and beyond, our strategy is to ensure that our existing and planned investments are aimed directly at driving us toward long-term sustainable higher growth. With that said, let's focus on 2008. We expect our growth rate will be at or better than 2000 levels driven in large part by investments we have made in acquisitions, in new products, services, technologies and capabilities to serve new applications and markets and third globalizing our business model and reinstituting, reconstituting our manufacturing foot print in order to put us closer to our customers. Much of our growth is coming from new areas and acquisitions. Our services and solutions business is becoming a larger portion of our revenue and we continue to evolve our global foot print, not just in manufacturing, but in engineering, back office, and customer support infrastructure. We will continue to make these kinds of investments to drive growth and sustain long-term business performance. In 2008, these investments, particularly the effect of acquisitions, will have an impact on our margins and consequently we are not projecting further margin expansion in 2008.

Before I turn it over to Ted to discuss Q4 results and 2008 in more detail, I would like to conclude by saying our demonstrated ability to diversify our revenue base, combined with our recent acquisitions, causes us to be optimistic that 2008 will be another good year for Rockwell Automation. We remain intensely focused on executing our growth and performance initiatives and are committed to higher growth while maintaining best in class margins and returns. Now, over to Ted.

Thanks, Keith and good morning, to all who called in. My comments will continue to reference the charts on our website. Turning to slide two, Q4 results summary, this slide summarizes key items from the income statements. Starting at the top, revenue in the quarter was $1.370 billion, an increase of 15% over 2006. 4% attributable to the effects of currency translation, 3% to acquisitions primarily ICS Triplex leaving 8% organic growth. Segment earnings were $275 million up 21% year-over-year resulting in a 1 percentage point improvement in margin. Purchase accounting expense was up $5 million versus last year's fourth quarter primarily due to the ICS acquisition. Walking down the page, you'll note that general corporate net was $22 million down about $1 million from last year. For 2008, you should think of general corporate net expense of about 20 to $22 million as a normal quarterly run rate. Interest expense was $14.9 million down slightly from last year's fourth quarter. The fourth quarter effective tax rate was 29.2%. That's up about 5 points from last year. You may recall that in last year's fourth quarter we recorded a $14.4 million benefit related to the recognition of certain tax assets which drove down the effective tax rate. This brings the full year effective tax rate for fiscal '07 to 27.8%. The small amount of income from discontinued ops in this quarter primarily relates to a tax gain associated with the Power Systems sale. The $26.7 million in Q4 of 2006 is primarily attributable to Power Systems results of operations. One more comment before we get to share count. The change in accounting impact that you see in the 2006 fourth quarter relates to the adoption of FIN 47 accounting for asset retirement obligations. Okay, now to share count. Average diluted shares outstanding in the quarter were 153.2 million, down 13% from a year ago. During the quarter we repurchased 3.7 million shares at a cost of $258 million and as of September 30, still had $26 million available under our previous $1 billion repurchase authorization.

Let's move to the third chart which shows a bridge of EPS from continuing operations from last year's fourth quarter to this year. Reported EPS in Q4 last year was $0.89. That included a gain of $0.07 related to the sale of our interest in Rockwell Scientific. Excluding the impact of this gain, our starting point for quarterly EPS comparison is $0.82. With $0.82 as the starting point, year-over-year EPS growth for the quarter was $0.25 or 30%. $0.18 of this increase is attributable to volume, margin and other items while $0.14 of that growth was due to lower share count. The higher tax rate in the fourth quarter of this year resulted in $0.07 lower EPS.

The next chart is a bridge of EPS from continuing operations for the full year 2007. Again, excluding the $0.07 due to the Rockwell Scientific gain, our starting point for EPS comparison for fiscal 2006 is $2.87. Our comparison to fiscal year '08 is $3.70, which excludes special charges taken in the second quarter. That's an $0.83 or 29% increase in EPS. $0.45 is due to all other earnings-related contributions and reduced share count at $0.38 to the EPS growth.

I'll now move to chart five, Q4 results, Rockwell Automation, continuing operations. As always, we're showing total Rockwell results over the past five quarters, excluding Power Systems. As I said before, our growth in the quarter was 15% year-over-year, 8% of that growth was organic while 4% was attributable to the effects of currency translation and 3% to acquisitions. Sales were up 7% sequentially. From a regional perspective, growth was led by strong performances in the U.S. and Latin America with improvement in Asia and another good quarter from Europe. Moving to the earnings side of the chart, segment earnings were up 21% year over year. Operating margin in the quarter was 20.1%, up 1 point from the fourth quarter of last year. It is not displayed on the chart, but our trailing four quarter return on invested capital was 24.1% up almost two points versus the year ago period.

I would like to go to the next chart, which summarizes the Q4 results of the architecture and software segment. Sales in Q4 were up 8% year-over-year, 5% excluding the effects of currency translation. On a sequential basis, sales were down 2% for the quarter. That was not unexpected given a very strong third quarter. Operating margin was 25.5% up 1.4 points from the fourth quarter of last year. Segment earnings benefited from volume and productivity efforts, partially offset by inflation.

Chart seven covers our controlled products and solutions segment. Sales in Q4 were up 20% year-over-year with 5% of that growth coming from acquisitions and 4% due to the effects of currency translation. Sales were up 15% sequentially with 4% coming from acquisitions. Our solutions businesses performed very well in the quarter and we believe we are getting good traction from our acquisitions and from the build out of our global domain expertise. Margins improved by one point year-over-year to 16.2% and segment earnings benefited from volume and productivity efforts partially offset by inflation.

Let me now turn to the geographic breakdown of our sales in the quarter. This chart provides regional growth rates and the far right column shows growth rates excluding the effects of currency translation and acquisitions. As you can see on the chart, we had a strong quarter in the U.S. at 7% growth. EMEA sales were up 8% in the quarter, a bit lower than previous quarters but still very healthy and we believe we have increased share in this region in 2007. Latin-American sales were up 19%, another strong performance in this region and Asia Pacific sales were up 11%, our best growth quarter of the year for Asia.

Let me turn to slide nine, free cash flow. We had $185 million of free cash flow from continuing operations in Q4 excluding tax payments related to the gain on the sale of Power Systems. This was 113% of net income and demonstrated continued improvement compared to the first two quarters of the year despite somewhat higher CapEx in the fourth quarter. Free cash flow for the full year was $531 million or 93% of net income from continuing operations.

Moving onto our guidance, slide ten highlights some headwinds and tailwinds that will affect fiscal 2008. While we expect growth to continue, we are planning for somewhat slower rates of growth in developed economies. Conversely on the top right-hand side of the page, we show anticipated revenue tailwinds. These include an expectation of continued strength in emerging markets. As you heard from Keith, we also believe we've created strong momentum in our growth initiatives particularly process, safety and OEM, and we expect continued payoff from the commercial investments we've made in EMEA and Latin America and improved performance in Asia, especially China. Acquisitions are expected to add about three points to growth in 2008, the largest contribution coming from ICS Triplex. In the lower left box, you'll see earnings headwinds. While acquisitions provide a tailwind on revenue, the acquisition revenue we are adding is primarily a solutions business at typical solutions businesses margins. Taking into account this lower margin volume and integration costs, acquisitions will put downward pressure on operating margin in 2008 and that, along with purchase accounting expense, will create some negative impact on EPS. Keith talked about various investments we are making to continue to globalize the business and ensure longer term sustained business performance. So, I will not repeat all of that detail. And obviously, we will experience some inflation in material and employment costs. On the tailwind side of earnings, we do expect to benefit from volume leverage. We also have great momentum in our productivity programs and continue to expect 3% to 4% benefit in 2008. And year-over-year, we expect lower share count to continue to contribute to earnings per share.

I'll move to slide -- or chart 11 now. This slide summarizes specific elements of our fiscal 2008 guidance with a comparison to 2007. Our full year revenue growth guidance is 10% to 12% with slightly higher growth for controlled products and solutions than for architecture and software. Of the total company growth, an estimated 3% is coming from acquisitions, most of that in controlled products and solutions. We expect operating margin to be about equal to 2007. The impact of acquisitions is expected to reduce operating margin by approximately one point. Between volume leverage, price and productivity, we believe we can cover inflation, the investments that Keith talked about, and hold margins about equal to fiscal year '07. We expect the effective tax rate for 2008 to be in the range of 28% to 29%. As we have noted before, the occurrence of discrete tax events, if any, could cause the actual rate in any quarter to vary. Taking into account the repurchase authorization announced yesterday, we expect diluted shares outstanding to average about 150 million in '08 compared to 161 million in '07. We're providing diluted EPS guidance of between $4.25 and $4.45 for fiscal 2008. We expect free cash flow of about 95% of net income with some growth in working capital, primarily to support growth outside of North America and we expect our return on invested capital to be up about another two points. Now, I'll turn it back over to Keith for an update related to capital structure.

Thanks Ted. Before we go into Q&A, I want to take a few minutes and comment on our capital structure. We previously told you we have been evaluating our capital structure and promised an update in early fiscal '08. We talked about two trigger events completing the deployment of the cash proceeds from the Power Systems divesture and upcoming maturities of long-term debt in January and the decision regarding refinancing. We will provide our update today. At September 30, we nearly completed the previous $1 billion sale reauthorization -- repurchase reauthorization I should say. In total during fiscal year '07, we repurchased almost 24 million shares for a total of about $1.5 billion. In the past four years, we have repurchased 53 million shares for a total of about $3 billion or cumulatively 29% of our outstanding shares at the beginning of the period. In that same four year period, we have increased our dividend by 76% and paid out a total of over $600 million. Our cash deployment priorities have not changed. Our first priority is growth and we are committed to funding both organic growth and acquisitions that fit our strategy. Beyond those needs, we intend to return excess cash to shareholders through dividend and share repurchase. To that end, as we disclosed in yesterday's press release, our board approved a new share repurchase authorization of $1 billion. We would expect to execute this authorization over the next two years. We will fund the repurchases with excess cash from operations. We will be flexible quarter-to-quarter and will moderate repurchases based on organic growth and acquisition opportunities and free cash flow generation. The strength of our business model and our strong cash generation capability puts us in the enviable position of being able to fund aggressive growth and return significant cash to our shareholders through dividend and a sustained share repurchase program. We also intend to issue long-term debt of up to $500 million. The proceeds of this debt will primarily be used to reduce outstanding debt including retiring $350 million of notes due in January, 2008 and to fund acquisitions such as Pavilion Technologies. Now let's open it up to Q&A. Rondi?

Operator we're ready to take questions.

Thank you. (OPERATOR INSTRUCTIONS) Your first question comes from the line of Bob Cornell with Lehman Brothers. Please proceed.

Hey, good morning, everybody.

Good morning, Bob.

Well, I would probably say for the collective audience congratulations for hitting the second half that nobody believed seven months ago in the forecast. And so that gives us confidence in the '08 guidance but I think the first question is what's going on with the Logix in the quarter and Processor group and what is the expectation for those pieces of the company in the '08 guidance?

Sure. Well, we had a very good quarter and a very good year in Logix. Logix's growth for the year was 15%. We continued the pattern of two thirds of the Logix sales coming from process and compact Logix so therefore we continue to see market share gains in the process space that we've entered and also add OEM's on a worldwide basis. As we have previously said, 20% growth requires strong performance in all regions and this past year we did not achieve what we needed in Asia and Canada for us to be able to hit the target of 20%. But we had very strong growth in EMEA, very strong growth in Latin America and good growth in the U.S. throughout the year in Logix.

Keith, I think people are wondering why you didn't explain exactly what was going on in the processor group in this quarter.

Yes, let me answer that, Bob. Today we have a much broader business than compared to when we started featuring Logix back four years ago. And certainly Logix is still a key success driver for Rockwell, but with globalization, acquisitions, we are evolving into a technology-driven solutions business of which the Processor is really only one part of that total solution and so our goal here now, going forward is to not just feature and highlight Logix but to talk about the evolution and how we're growing the total business and how Logix allows us to expand into these new areas. So, it's not just a single focus any more on Logix, it's the broader breadth of the portfolio and the capabilities that brings us to address more markets, more customer applications and drive a broader set of capabilities across the company. But it's still the focal point of what we're trying to do to put ourselves in a position to transform the company but it's not the only dimension of us as a company anymore and it's for that reason, Bob, that we're starting to not always focus on it as the main activity of Rockwell Automation. It's no less important. It certainly had a very good year and there's nothing on the horizon, quite frankly, that says it's not going to continue to grow and, in fact, in 2008 our target is another year of 20% growth for that family. So, once again, you know it's becoming a $650 million business and for that to continue to grow at 20%, we do need to hit on all cylinders and certainly that's the expectations that we have as a management team going into 2008.

Yes, one other question, Keith, thanks, that's a good answer. How about the momentum in Asia? It's better this quarter maybe just do a bit more of a -- a documentation of what you've done and did you see the business accelerate as the quarter went on and how does Asia fit into the '08 guidance? China in particular.

Sure, sure, Bob. Well, certainly -- certainly Asia performed better in the second half of the year and in particular China performed better in the second half of the year. As we've talked previously, we need to have emerging Asia growing at 20% or more for us to be -- for us to feel that we're growing market share and more importantly making an impact in the region. And for next year, we're expecting that China will grow at that level and that all of emerging Asia will grow at that level and likewise we had talked about the need for Asia to be growing at a 15% rate in total and that is our expectation for next year. So, we still have -- we talked about this a couple of calls -- couple of the last calls. We're very happy with the momentum we have coming out of the year in Asia. But we also know that we still have more to do and we are working diligently on getting that done but we like the progress we've made. We have more work to do and we certainly expect 2008 to be better yet than 2007 was in Asia.

Okay. Thanks very much.

Your next question comes from the line of John Baliotti with FTN Midwest Securities. Please proceed.

Good morning, Keith.

Good morning, John.

Just to tie up a loose end with Bob's question. 15% for the year for Logix would imply high teens for the quarter, is that accurate?

That's correct -- almost -- basically the same number, just slightly under 15.

Okay, and with respect to your overall guidance for margins for 2008, you said about 100 basis points of headwind with M&A acquisitions done and then offsetting inflation and so on. So, would -- maybe Ted would answer this, so overall you would expect underlying core margins to be up 100, 150 basis points somewhere around there to offset that.

Yes, roughly -- basically just the offset to the acquisition impact.

Right. Okay. Thanks.

Sure, John.

Your next question comes from the line of Steven Tusa with J.P. Morgan. Please proceed.

Hi, good morning.

Good morning, Steve.

Just a question on the revenue outlook. You talked a lot about the initiatives and the expanded markets benefiting your number. It's a pretty good number especially relative to the cautious commentary we're hearing from some other companies. What's your -- if you looked at your core markets by geography what are your expectations there? You can just give an underlying market growth rate and then we can get an idea of what kind of premium that you're execution is driving on the top line?

Well with respect to what our expectations are for the -- for our growth in each one of the regions we're expecting the U.S. growth to be in the mid single digits. We expect Canada to be at roughly right around 10%. Latin America, high, high teens growth, EMEA mid-teens growth and Asia mid to high-teens growth. Like we said earlier, slightly over that 15% target that we hold out for where we need to be. So, that's how we're kind of viewing our growth on a region basis that rolls up into the overall -- into the overall target that Ted identified in the guidance.

So, when you look at it this way, the U.S. actually end markets that you would look at are probably flat to up so you continue to take share there in EMEA, I am not sure if you are including ICS in there, but, looks like you're continuing to take share there and that actually accelerates from the rates you put up in the fourth quarter and then in Asia you're kind of, getting back to a market-type of growth rate is that from a high level -- good way to look at it?

From a high level the only thing I would comment on -- Europe, the number did not include ICS, so, we would be growing faster than the market in Europe. We would expect to be slightly taking share in Asia as opposed to just at market growth rates next year if we hit our targets, but your high level characterization was correct.

What gives you the confidence that Europe accelerates from the fourth or reaccelerates to rates it saw in the first half?

Well, the confidence is in the continued execution of the strategy that we put in there a couple of -- well basically now two years ago. The continued focus on where we have differentiation, which is all about the integrated architecture, the focus on OEM's which we continue to feel is an area that we can get better at as a company and the focus on some of the key verticals that we believe we can once again create that differentiation and then finally, Europe is not a homogenous entity, and quite frankly we think there are some areas where we can perform better than we did this past year and where we have put that into the equation as well. So, I guess it's -- really that aspect is about the continuous improvement culture we're building here. We had a very good year in Europe. We feel we can do a little better there and that, plus the other areas, are why we have optimism in our ability to continue to drive growth in that region.

Okay, and then just a nitpicky one on share count. You're looking for I guess, 150 for the year but I guess you finished around that area. I would expect that to be lower. Is that just conservatism on the timing of your buybacks? Timing of cash flows? 150 just seems like a kind of a conservative number.

Well, Steve, our fourth quarter was 153 too, that's fully diluted after the fourth quarter.

Where did you end in the fourth quarter though?

152.

Oh okay, got you. That makes sense. Great, thanks a lot.

You bet.

Your next question comes from the line of Mark Koznarek with Cleveland Research. Please proceed.

Hi, good morning, everyone.

Good morning, Mark.

Is it fair to say when we're looking at 2008 that it's going to be broadly driven by services, both internal service growth and acquisition and not so much by hardware products and that's one of the key reasons why we're not seeing as a dramatic margin leverage as we've had in the past?

No, I don't think that's the case. If you look at the growth next year, it's fairly balanced between -- between the, I'll call it, the more component product businesses and the solutions business. Now there is some mix within that and then obviously, we have the acquisition aspect that tips it probably a little favorably to the solutions business next year because of that.

Mark, just to say that just slightly differently, the acquisition volume addition is primarily solutions-based. If you take that out and what is left in the core business, there is pretty balanced growth across the portfolio.

Okay, so, excluding the acquisitions, we're doing something in like the 8% to 10% range?

Yes.

And so -- I'm kind weaving towards a question, which is in order to generate 8% to 10% on the solutions slide, is there another tranche of personnel additions in the vertical market space that's going to be required similar to the programs you've been executing over the last couple of years?

Well, I wouldn't -- Mark, I wouldn't say there's a tranche of people coming in. What I will say is that our growth is occurring in new areas that we don't have the ability to -- that we don't have the ability to leverage an existing infrastructure and so our increases are in support of growth and the ability to drive the growth and sustain the growth in the new areas, whether it be the new geographies or, as you said, some things with respect to verticals, some things with respect to the process space, but these are all new areas for Rockwell Automation that we're trying to be able to maintain a high growth rate in and that's what's -- and that's what is driving the additional investments that we're talking about.

Hey, Mark, just one clarification. Our guidance for total Rockwell is 10% to 12% growth. We talked about 3% of that coming from acquisitions -- I am sorry 9% to 11%. So it's basically 6% to 8%.

Okay. Good, thanks for that clarification. And then I apologize, I got on the call just a minute or two late, but did you say anything about Pavilion Technologies and if not, could you explain it a little bit and kind of give us a rough idea of the size?

Sure. We have not -- I did not make any comment to that directly. I spoke to acquisitions in general but Pavilion Technologies really adds advanced processed control to our portfolio and it's an expansion of our control competencies and capabilities and it is really focused, today at least, in the processed space. And what it is, is basically a predictive modeling capability. It's production performance management and environmental compliance solutions for mainly the process but also the hybrid industries. And what they bring us is the ability to improve manufacturing processes, really around real time plant wide optimization and it's very analogous to what we're talking about with respect to plant-wide control and the ability now to create the optimization layer and the predictive modeling control and optimization software platform that's required in a lot of the advance process control applications in the industry today. And it helps us in a number of verticals, including some very interesting ones for us -- the ethanol bio fuels area, obviously oil and gas with our investment in ICS Triplex and ultimately into some of the consumer goods and consumer product areas. So, it's a great acquisition that continues to expand our control capability plant wide and it is an important addition to our business.

Is it 1% of sales? That kind of range?

It is -- let me do the -- no it's less than 1% of sales.

Okay. Thanks very much.

You bet, Mark.

Your next question comes from the line of John Inch with Merrill Lynch. Please proceed.

Thank you, good morning.

Good morning, John.

Good morning, Keith. Hey, just as a clarification, those growth rate expectations in overseas markets were those organic or does that include the contributions from foreign exchange?

Those were -- when I gave you those numbers, those were organic. It did not include currency or acquisitions.

So just to be clear. So organically, EMEA Keith, this year was up about 14%. You think that replicates -- your expectation for Europe has fully dialed in kind of this $1.48, $1 versus Euro and $100 oil. You feel confident in sustaining that trend?

Yes, I mean we feel confident. It's hard to -- I think out of the two of them that you mentioned, it's hard -- I mean we don't have a clear understanding of what $100 a barrel of oil does because it has positives and negatives. The great positive is all of our customers want to save a lot of energy and that's a great opportunity for us as a company. And certainly the industry with oil that high invests a lot. So the people that are in that supply chain are looking for more ways of finding more oil or alternatives to oil become very attractive. So those are all positives. The negative is it's an input cost to people and what does it mean to where they can invest and I don't think that's played out yet. So, that remains a wild card and is something that we'll get a better feel for as the year plays out, but we -- so far, I would say industry has proven to be able to absorb $80 a barrel pretty well. So, where the point is, I'm not sure, but we have not seen a change in behaviors at this point in time.

Yes, well if you can pull it off, it's going to be impressive to a lot of people. Ted, if you look at the margin growth this year versus last year so 19.7 versus 19.2, up -- or, excuse me, 50 basis points you're sort of now suggesting that underlying margin's going to go up (inaudible) percentage points. So am I correct in then assuming that conversion margins or your underlying margin trend is actually going to accelerate in 2008? Is that the way to think about it, and is there a way to translate this into kind of a conversion margin ex-acquisitions?

No, John, I think you're probably trying to be too scientific. We're saying the acquisition impact is approximately a point. It's probably somewhat a little bit under a point and we do believe that in the core business, despite some of the investments we are making, we can make up for that in part because of productivity performance.

But, what does that equate to? Because last year you gave us the conversion margin expectation 30 to 40. What would that translate into this year?

If you took out the impact of acquisitions this year, conversion margin next year would be approximately equal to our conversion margin this year, maybe a couple of points lower.

And then just lastly, Ted, how much pension, I guess you had about what, $0.15 of pension in the 370? How much extra pension based on where the plan closed do you expect in 2008?

We have a little bit of additional pension tailwind in 2008, but we're also expecting somewhat higher medical costs in 2008 which basically offset that.

So it's a wash?

Yes.

Thank you.

Your next question comes from the line of Nicole Parent with Credit Suisse. Please proceed.

Good morning.

Good morning, Nicole.

I guess to follow up on Bob Cornell's question with respect to Asia, could you give us an update in terms of the distribution effort over there and how you see that ramping up over the next couple of years?

Absolutely, and here we'll talk about -- there's really two different parts. I'll talk about emerging Asia where there is much less infrastructure and much less of a mature distribution capability and in particular I'll talk about China and India. That is one of the areas where we have to continue to build infrastructure. Now that's not Rockwell Automation infrastructure, but we still have to develop viable distributors and attain and embrace and work with people that are interested in building distribution as a business in both of those areas. And so that's one of the reasons. Recently we have established a global distribution position, one that channels, which would be distributors and system integrators but we believe that that's an important element of our ability to continue to grow in emerging Asia and so we need to put a much stronger focus on that. We have elevated that to a very key position in our sales and marketing organization and one of the focuses will be on building -- on building better channel partners in the emerging regions of the world and in particular Asia, and otherwise we cannot achieve the growth rates in the long-term and more importantly, you can't support customers locally without that type of partner. And so we're very, very focused on being able to do that as I said particularly in the emerging economies.

And so is that investment largely why you'd characterize globalization as a headwind?

No, the investment there is not really a lot for us. That's just finding viable partners that are able to invest and be able to commit the capital to building a distribution and/or a system integrator capability. Our globalization investments are in a couple of categories. First, it's the globalization of manufacturing and we talked about that in the second quarter when we took a charge. We are re-foot printing our manufacturing capabilities on a worldwide basis and that's probably the most important aspect of when we talk about globalization headwind. The second would be the continued buildout of what we started last year of engineering resources. Engineering resources in Asia and Eastern Europe and the continuation of the evolution of our business model to where we have manufacturing, engineering, marketing, back offices, customer support capabilities, all of those closer to the customer and because of our growth and the majority of our growth coming outside North America. That's what we mean by the need for globalization spending. So it's multiple dimension and not at all -- I mean it's -- a very, very small part of it is the investments we have to make to be able to grow distribution.

Great, that's helpful. And then just one last one. Keith, when you talk about your first priority for '08 as growth, could you talk a little bit -- I'm a little surprised to hear you talking about growth given where we are in the cycle. Could you just talk about underlying productivity and key margin drivers I guess in the core U.S. business given what you've talked about for the headwinds for the businesses outside of the U.S. for 2008?

Okay, if I heard you, you want me to talk about our productivity programs?

Yes, please.

Okay. No problem. We didn't talk a lot about that yet, but we have not changed our focus on productivity. We have, like last year and like all of the future years, we have a 3% to 4% cost productivity target for our company. We expect to hit the high end of that range this year. It is fundamental for us to be able to continue to improve and invest in these areas we kind of just talked about because we need to offset inflation and be able to drive the incremental investments that we require in that globalization aspect of our business as well as absorb some of the dilution -- not some of -- absorb all of the dilution of the acquisitions that we've made. So, productivity remains very important for us. It is across the entire business. All functions, all areas, are driving that 3% to 4% cost productivity and there's no less intensity or focus on that in 2008 than there was in 2007 and we have a lot of confidence in our ability to do that. We have probably the best defined programs across the company that we are able to track on an ongoing basis and in fact some of our businesses are already trying to identify the 2009 productivity activities. So, it remains a very important part of our business. It's becoming a fabric of the culture of the company and no less important than growth but we believe, in today's environment, we have a lot of opportunities to grow and that's why we want to take advantage of them during this period.

Great. Thank you.

Operator we'll take one last question.

Your last question is a follow-up from the line of Bob Cornell with Lehman Brothers. Please proceed.

Yes, thanks for taking this call. Maybe it's just me but I had a stronger revenue performance for architecture and software in the quarter because you had the easy comp in the Processor group. Was it just me or was this an unexpectation quarter. Maybe just give a little more detail into the performance of architecture and software in the quarter?

We had a very strong third quarter in architecture and software, Bob, but I would say the fourth quarter performance was pretty much aligned with our expectations.

Okay and then one final question, I mean you -- the international markets are all growing robustly. Again, this maybe a little bit repetitive, just which of the businesses are driving that. Keith, you said process, compact, Logix, safety. Maybe just flesh that out a little more, please.

Sure, but let me just give one other comment to your question to Ted. We had talked in last release, that we expected a very strong fourth quarter in our solutions business because of the backlog, because of the timing, and so the quarter played out pretty much just as we thought. It wasn't that architecture and software was not growing or not what we had expected. It was the expectation that we would have strong solutions performance because of our backlog that we built the first half of the year and we knew that that was going to be a strong contributor to revenue growth and that was why we guided the way we did towards the end of the year.

Actually thank you. I do remember that now, but how about the outlook for '08 and the strength in these international markets?

Yes, well, the international markets a couple of things. One, the one thing that is true about our international business, in particular in Asia, Latin America, and emerging regions is that we have to help the customers more by creating a solution for our customers than we do in North America. So, one of the things that occurs is that we are more involved in solutions, in services, doing engineering and helping customers as opposed to a pure product sale. And many times we don't have that large installed base that gives what I would say a lot of the MRO-type of annuity business. So, the color of international business is more solutions. It is more around infrastructure -- and infrastructure and natural resource-based businesses than it is in the consumer-types of areas. And so we have a more power centric portion of our business in some of those emerging economies as well so it's a much different balance and mix within our segments and between our segments when you go outside the U.S. So, that hopefully covers what you were looking for, Bob.

It does, Keith, thank you very much, that's very helpful -- appreciate it.

Hey, this is Ted. I have a clarification. I misspoke earlier when I tried to clarify the answer to Mark Koznarek's question about core growth. Our guidance for top line growth is 10% to 12%. Acquisitions, we believe will contribute about 3%. So the core growth is in the range of 7% to 9%. I apologize for that error and I will beg your indulgence. Perhaps I shouldn't try to do math in my head this early in the morning.

Okay. That concludes today's call, and thank you to all for joining us.

This concludes today's conference call. At this time you may disconnect. Have a great day.